Estonian Human Development Report

In addition to threats, the international economic recession
also presents certain opportunities. Estonia’s wealthier
neighbours are under more pressure to economize by moving
their production or, in some cases, a certain part of their
service industry (along with the customers) into cheaper
but still trustworthy environments. The banks also have
credit resources at their disposal in principle, but do not
use them due to their lack of trust in the macroeconomic
or social stability of the potential target countries as well as
the level of quality of their institutions and business culture.
If Estonia, a country that still has a cheaper operating environment,
can show that it is able to act effectively even in a
time of crisis and can retain social stability and overcome
its economic problems, it may attain a significant advantage
over other countries and emerge from this difficult stage of
development as a winner.
Which economic development scenario is
optimal with regard to human development?
The potential crisis scenarios can be differentiated on the
basis of the focus of the government’s set of measures as
well as on the basis of the level of deterioration (if any) in
the international economic environment after the implementation
of the measures. However, it is practically
impossible to predict with any certainty what will happen
to the international economic background and how
quickly it will occur.
The government can: A. delay implementing measures;
B. prefer the set of more active measures that are aimed
largely at the internal market and retaining employment;
C. focus on implementing the active export-oriented
measure package. The external environment may: 1) begin
stabilizing gradually within this year (2009) and improving
thereafter; 2) continue declining. In the latter case, we
can differentiate between a further sharp decline and a
less drastic worsening of the situation, which constitutes
a crisis that drags on for a long time.
Using this method, we have a selection of at least 6 different
scenarios: A1, A2, B1, B2, C1 and C2.
In the case of the type A policy, we will be unable to
think of and/or carry out an approach with sufficient clarity
and force. The costs will be limited to a certain degree, but
not enough. Our reserves will be gradually depleted. There
will be no attempts to take a loan. The country’s leaders will
not dare to develop any explicit stimulus programs and
would not have the money to implement such programs in
any case. In the case of the A1 scenario, this policy may even
work out (although it is still very risky) if there is a favourable
turn in the external environment. In the case of the A2
scenario, regardless of whether the sharp decline or dragging
crisis sub-scenario occurs, this inability to decide will
clearly lead to disaster. The government will then have to
turn to the IMF for help and we will live through a repeat of
what happened in Latvia if we are lucky and be subjected to
an even worse experience if we are not.
The type B policy is characterized primarily by two
goals: avoiding a high level of unemployment and guaranteeing
the provision of large-scale national support to
people and families in difficult circumstances. The first
goal can be achieved by focusing on part-time work, the
voluntary cutting of salaries at companies, retraining, and
providing seed capital to help the employees of companies
that have gone out of business to start their own companies.
The second goal can be reached through unemployment
benefits, maintaining the level of pensions, and timing
housing loans, etc. Finding the financial backing for
the necessary measures and benefits will prove to be a
considerable problem in the case of this policy, even if we
are successful in limiting the growth of unemployment.
Moreover, it will be very difficult to make the necessary
budget cuts in the case of this approach as such cuts will
require us to limit expenditures on social services. A solution
to this problem could be either the additional taxation
of the wealthier segment of the society (progressive
income tax, car tax) or the attempt to get a foreign loan
at any price. It is unlikely that either method of acquiring
the necessary resources will become operational and thus
the depletion of the country’s financial reserves will not be
significantly slower than in the case of the type A policy. If
the external environment begins to improve (scenario B1),
this policy may be successful, but in the case of scenario
B2, everything will depend on what version of the latter
will take effect. If the decline is short and maybe even if
it is sharp, the type B policy will help the society survive
and avoid the degradation of human and social potential.
In the case of a longer decline, however, the domestic
demand of a country with a population that is becoming
poor will be too low, and along with the deterioration of
the macroeconomic environment, this will endanger the
sustainability of the scenario.
The type C policy would require the provision of support
(presumably selective) by the government to companies
with export capacity, for example by having the state
guarantee their credit applications. Furthermore, enhanced
measures for bringing export-oriented foreign companies
into Estonia will be devised. This will be accompanied by
a relatively harsh budget cut, due to the fact that bringing
order to the macroeconomic environment, including the
adoption of the euro, is considered one of the main conditions
for this strategy. Social benefits and pensions may suffer
as a result of this policy. In the case of the C1 scenario, the
policy may yield very good results as it helps to restructure
the economy. At the same time, the degradation of human
and social potential will not be far-reaching if the external
environment improves quickly. If the policy is implemented
effectively, it also has a chance of success in the case of the
gradual version of the C2 scenario. Carrying out this policy
promises to be a complete failure, however, if the deterioration
of the external environment is strong and drags on for
a long period of time. In this case, the funds devoted to the
promotion of export business must simply be written off.
Another problem in the case of the type C policy is gaining
public support for it, since the initial base of beneficiaries is
relatively small (also geographically). It would certainly be
smaller than in the case of the type B policies. Compared
to the other types of policies, the success of type C policies
depends on the strength of our labour force potential and
the level of our business owners.
As the analysis of the different scenarios shows, it is
extremely difficult to give unequivocal advice on policies
for handling the crisis as the changes in the external environment
may prove to be different from those predicted.
However, it is possible to identify some measures that
fit multiple scenarios and function in the case of different
external environment dynamics. Such measures primarily
include investments, the creation of employment
opportunities through building modern infrastructures,
and education.
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